The big story in the media space last year was Disney’s $70b purchase of 21st Century Fox. In fact, it was one of the ten largest deals of the decade across all sectors of the market. Much of the post-deal focus has been on Disney’s side of things – unsurprising considering the sheer scale of the enlarged firm’s asset base. That said, the rump of Fox left behind, now listed as Fox Corporation (FOX), is a pretty interesting company in its own right, and possibly worth a look for blue chip hunters.
Fox’s Cash Cows
What stands out here is how the asset base revolves almost entirely around live programming like news and sports. The major money spinner is the Fox News Channel, followed by the various Fox Sports channels, the Fox Network and the 28 regional Fox Television Stations. Considering many media investors are terrified of Netflix, these are good assets to own. Why? Well, consider how Fox makes its money, which is broadly 50/50 in terms of affiliate fees and advertisements. (Affiliate fees are the payments that TV-service providers like cable companies pay Fox to show its channels to subscribers). Now, TV assets susceptible to losing viewers to Netflix will see both of those revenue streams suffer. The kind of ‘live’ content pumped out by the Fox News Channel, or NFL on Fox, is inherently more immune to ‘on-demand’ shifts.
The Fox News Channel in particular is the company’s stand-out asset. It is, quite simply, a money spinner. It will generate around $2.75b in combined affiliate fee and advertising revenue in 2019 according to some analysts, almost one-quarter of company total. Not only is it popular – 8pm to 11pm EST (“prime time”) draws around 2-2.5m viewers on average – but Fox owns the content outright. Said content is also relatively cheap to produce. I mean, prime-time shows like Hannity or Tucker Carlson Tonight bring in a few million views each night on average. The only major cost is the wage bill of the host. Fox doesn’t break down the channel’s finances, but it wouldn’t surprise me if it was responsible for the lion’s share of company profit.
Sports broadcasting is the other money maker for Fox. As with Fox News, the big plus point is that this is live unscripted content. In other words, the traditional TV set-up retains a decent grip on sports fans. The upshot is that affiliate fees and advertising also remain fairly solid. To illustrate that point, take a look at this snippet of advertising data from Fox. Back in 1998, an advertiser purchasing one ad-unit in one episode of every comedy and drama nominated for an Emmy Award was buying themselves around 330m ad-impressions. That is to say, its advertisements would have shown up 330m times on TV screens across the USA. That figure had collapsed to just over 30m by 2018.
Compare that to sports viewing, which has held up fairly well. An advertiser buying one slot in twenty major sporting events was buying himself around 465m impressions back in 1998. By 2018, one slot in the same twenty events still generated over 435m impressions. The only real downside to live sports broadcasting is that the content is owned by a third-party, which means that Fox has to pay in order to license it. Not only that, but sporting broadcast rights are expensive. Indeed, programming costs take up around 75% of Fox’s total expense bill, with sports taking up around two-thirds of that. That means half of the company’s entire expense bill rests on the costs associated with sports programming.
The company generated total revenue of $2.75b in the first quarter of 2019. Of that, 20%, or $530m, ended up as after-tax net profit for Fox’s stockholders. The company is a cash cow, plain and simple.
The shares currently trade for around $36 apiece. Quick math suggests the market is valuing Fox’s equity at around $22.5b. Net debt stands at circa $4b, so let’s call the total enterprise value $27b. Backing that up is around $2.5-$3b worth of annual EBITDA.
Ordinarily, you would be hesitant to call an EV/EBITDA ratio of 9 cheap, though there are a couple of mitigating circumstances here. Firstly, the earnings quality is extremely high and justifiably worth a premium. Secondly, the balance sheet is in good shape. Together, those two points imply stocks buybacks and acquisitions are on the table. Finally, the new company is exhibiting some decent growth. Both EBITDA and net profit grew in the mid-to-high single-digit range versus 2018. Given how hard it is to find any value in the blue chip space, paying $36 for a stock that could earn over $3 per share next year doesn’t strike me as a bad deal.
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